Chicago’s retail market will improve further in 2013 as healthy job creation supports another year of strong consumer spending, according to a retail market research report from Marcus & Millichap Real Estate Investment Services.
Metrowide, build-to-suit projects and pre-leased shopping centers dominate the development pipeline, which will drive a sizable share of new demand into existing shopping centers, according to Marcus & Millichap.
In-city centers stand to post the most improvement this year as payrolls in the typically higher-paying professional and business services sector return to their previous peak level, and the delivery of more than 3,300 luxury apartments lures affluent renters to the area, the report states.
Marcus & Millichap also points out that the anticipated influx of new residents to the city has prompted expansion among grocers. Mariano’s recently signed on to anchor a new retail center in Oak Lawn and Wal-Mart is under way on a Neighborhood Market at 47th Street and Cottage Grove.
“I’d say that there is some natural growth in the market and there is not a lot of new supply,” said Andrew Hochberg, CEO, managing principal and managing broker at Next Realty. “Supply got absorbed over the last year or so and some new properties opened, mostly in the grocery sector.”
While the suburbs have lagged in the recovery cycle, vacancies in well-located centers have started to capture the interest of expanding retailers, particularly chains specializing in home-related goods, according to Marcus & Millichap.
“I think that for suburban downtown retail, if you’re on a major shopping street in the downtown, you’re having good luck, but if you’re off the main street of a downtown, you’ve got a problem,” Hochberg said.
Marcus & Millichap also predicts that investor demand for Chicago retail properties will remain elevated this year as job creation continues at a healthy pace and recovery in the housing market strengthens. Transaction velocity, however, will hold fairly stable as better-quality listings remain in short supply.
“People aren’t building until they have commitments from the tenants and there’s a flight to quality,” said Keely Polczynski, vice president at CBRE. “So people are looking for key intersections and are really looking at the strong underlying fundamentals of the real estate. The fact that construction is slow will help absorb the vacancy that we have, but there is still going to be a flight to quality. So in the B and C markets, you’re still going to see some vacancy.”
The Marcus & Millichap report goes on to state that the lack of for-sale inventory will be most pronounced in the single-tenant sector, where reduced retailer expansion through the downturn led to a sizable reduction in deliveries.
As a result, cap rates for newer high-credit deals will hold near historically low levels, according to Marcus & Millichap. The most sought-after single-tenant assets, such as corporate-owned McDonald’s, start in the low- to mid-4 percent range, while Chase Bank properties trade sub-5 percent and newer Walgreens sell between 5.75 and 6.0 percent, but have dipped to around 5.5 percent for top locations.
Marcus & Millichap also notes that over the past year, cap rate compression has prompted many traditionally single-tenant investors to pursue small strip centers occupied by high-credit tenants. Such properties change hands at cap rates between 6.25 and 7.75 percent, with in-city assets falling at the low end of the range. The search for higher yields has also sparked demand for better-quality retail properties in expansion markets, including parts of Kane, Will and Lake counties.
“I’ve been surprised at how quickly most of the big boxes have been absorbed, especially in what are traditionally A markets,” Hochberg said. “In B and C markets it’s much more of a challenge. If you have an A market, there is just no space and if you have a C market, you can’t give it away. So it’s really bifurcated or trifurcated.”
Meanwhile, the overall outlook for Chicago’s retail market remains positive.
“Statistically during the second quarter of 2013 our vacancy rate decreased from 8.8 percent to 8.6 percent over the previous quarter,” Polczynski said. “So that’s a 20 basis point decline from one year ago. Our net asking lease rates also rose to $17.18 per square foot, which is the highest rate since 2008. There are a number of retailers expanding and the investment market is extremely hot right now.”
Polczynski added there’s a consensus in the market that interest rates are rising and that they are going to start to rise more rapidly either toward the end of the year or the beginning of 2014.
“That’s got a ton of investors looking for deals to lock in those low interest rates. Because the demand is higher than the supply, the market has been great,” she said.
In terms of construction, neighborhood, community and strip center completions in the city will total 290,000 square feet in 2013, according to the Marcus & Millichap report. Last year, in-city shopping center deliveries totaled around 343,000 square feet.
Polczynski said a lot of the big retailers are focused on urban markets.
“Target has plans to do a City Target at the corner of Belmont, Lincoln and Ashland, which is a smaller concept,” she said. “They will open their full Target on Division, and they’re very aggressive. Whole Foods is still very aggressive in the city, and then we have some smaller format grocers like Plum Market, which opened at Division and Wells. They’re also very aggressive but they’re very careful with their expansion plans.”
With limited shopping center construction under way in the suburbs of Chicago, Marcus & Millichap predicts many retailers will target well-located existing properties for expansion. As a result, vacancy should decline moderately.
The suburbs also are experiencing an influx of bedding retailers.
“We also have kind of a bedding war,” Polczynski said. “We have a lot of mattress retailers.”
Two new mattress retailers have recently entered the market, according to Polczynski. One is Art Van Furniture, which recently opened in a former 46,000-square-foot Dominick’s at Orland Greens Shopping Center in Orland Park. The company signed a 10-year lease and spent $2 million to build out the store, with plans to open five additional stores by the end of the year, Polczynski said.
“That’s pretty aggressive,” she said. “They also opened a 183,000-square-foot distribution center in Bolingbrook, so they’re really planting their flag here.”
Sleepy’s, which is more of a traditional mattress retailer, also has entered the market, according to Polczynski. The company has 800 showrooms, mainly in the Mid-Atlantic region and in the Northeast, she said. Sleepy’s opened a store in Orland Park at 159th Street and Harlem Avenue and another location on 95th Street in Evergreen Park, she said.
“They’re also negotiating several deals in the city right now, so they’re very active,” Polczynski said.